PM Imran’s China trip to give fresh fillip to CPEC

Five-year industrial framework agreement vital to develop SEZs

Shahbaz Rana February 04, 2022


Pakistan and China are scheduled to sign a five-year Industrial Cooperation Framework Agreement to re-energise the China-Pakistan Economic Corridor (CPEC).

Moreover, Islamabad would also seek rollover of $4 billion Chinese loans and increase in size of $4.5 billion trade finance facility

The broad-based discussions will be held in Beijing as Prime Minister Imran Khan on Thursday began a four-day official visit to China. During the visit, he would join other world leaders at the opening ceremony of the Winter Olympics scheduled to be held on Friday.

According to the text of the framework agreement, Pakistan has agreed to take responsibility of the Chinese lives and property, in addition to providing “special beneficial support for water and power supply which are necessary to develop SEZs (special economic zones), and provide efficient and favourable policy support for Chinese enterprises which are intending to invest or have already invested in the Pakistani SEZs”.

During PM Imran’s visit, Pakistani authorities will seek bigger fiscal package, including contribution in a new fund – the China-Pakistan Industrial Cooperation Fund – to facilitate relocation of Chinese industries to Pakistan, according to sources and draft of the agreement.

Read: "With economy in mind, PM Imran lands in Beijing on official trip"

On the fiscal side, the government is seeking rollover of $4 billion loans and increasing the size of trade finance facility from the current $4.5 billion to around $10 billion, they added.

But the final decision would depend on a meeting between Prime Minister Imran Khan and Chinese President Xi Jinping, the sources said.

“The federal cabinet on Thursday granted approval to the industrial framework agreement, which would be signed during the PM’s visit,” Board of Investment (BoI) Secretary Fareena confirmed to The Express Tribune.

The cabinet approved the draft agreement on the day PM Imran left for Beijing with an agenda to bring both the countries economically and commercially more closer to each other.

Just before leaving for Beijing, Finance Minister Shaukat Tarin removed yet another irritant in bilateral relations by agreeing to open a revolving bank account that would have balance equal to 22% of the power purchase payments to be made to the Chinese power plants. This was a major Chinese demand to save its investors from the circular debt cycle.

The government also agreed to release another Rs50 billion to the Chinese power plants to lower their dues towards the government. It has already approved to make $11.6 million payments to Chinese nationals who died or were injured in a terrorist attack.

“The progress on CPEC has been greatly affected during the International Monetary Fund programme that put many checks by placing limits on the government’s primary budget deficit and issuing sovereign guarantees,” sources told The Express Tribune.

Framework Agreement

The signing of the Framework Agreement on Industrial Cooperation under CPEC is seen as a first “serious” step by the government during the past three-and-a-half years to put the multibillion initiative of President Xi back on track. Pakistan was trying to get the deal done during the past over two years.

The framework agreement will be signed by BoI Chairman Muhammad Azfar Ahsan and the chairman of China’s the National Development and Reforms Commission (NDRC).

The agreement will be effective for five years and is extendable automatically if no party notifies the other not to extend it at least three months before the expiration date.

According to the draft agreement, China has advantages in experience, technology, financing, and industrial capacity, while Pakistan enjoys favourable conditions in natural resources adequate labour, manpower, quality infrastructure, access to the international markets and optimal policies for industrial development.

The main objective of the framework agreement is to enhance the industrial competitiveness of Pakistan by encouraging Chinese enterprises to build factories and set up businesses in the country. The focus of the partnership is to improve skills development, enhance labour productivity and encourage joint research and development.

The principle of the partnership is to respect the enterprises as responsible entities on market-oriented guidelines and to follow the business rules and international practices.

The two countries will also discuss establishing the China-Pakistan Industrial Cooperation Fund to support projects under industrial cooperation and in other relevant areas.

Pakistan would not be required to create a new fund management structure and instead use the existing Pak-China Investment Company to regulate the industrial fund, former BOI chairman Haroon Sharif said.

He said the purpose of the newly proposed fund was to provide long-term financing to the Chinese industries relocating in Pakistan since commercial banks did not have such appetite.

Sharif said there was also a need to develop a one-window solution to the Chinese investors like the DIFC financial center offered to the investors in Dubai.

China will help promote industrialisation, development and population of the economic zones, enhancement of service sector competitiveness, forecasting perspective demand for human resources, ensuring requisite training of workforce; and for the initiation, planning, execution and monitoring of the projects, according to the text of the agreement.

Importantly, both countries have agreed to attach high importance and give priority to the development of nine prioritised SEZs under CPEC, whereby three SEZs are at an advance stage of development, namely, Rashakai SEZ, Allama Iqbal (M-3) SEZ, and Dhabeji SEZ.

Read: "Visit to China 'very important' for Pakistan's economy: Tarin"

Both the countries will research on the prioritised development of Bostan SEZ and will also formulate joint strategies to attract third party participation under the industrial cooperation.

China will encourage its enterprises to establish industries in the SEZs for export-led growth and industrial concentration, while utilising local raw material and manpower, including labour, as well as professionals.

Pakistan will facilitate the Chinese businesses in an efficient manner in accordance with the domestic law. It will also improve the domestic business environment, provide policy support for Gwadar Free Zone, Rashakai SEZ and other SEZs, guard the safety of enterprises and employees investing in the country, provide special beneficial support for water and power supply which are necessary to develop the SEZs, and provide efficient and favourable policy support for Chinese enterprises which are intending to invest or have already invested in the SEZs.

China has agreed to bring its advantages in equipment, technology, management and finance into play to support industry development in Pakistan, besides having special focus on the development of the Information and Communication Technology (ICT) sector.

Similar arrangements shall also be made in other sectors (pharmaceutical, engineering, agriculture, light manufacturing, home appliances and construction materials) mentioned in the long-term plan or any other areas mutually agreed, according to the text of the deal.

Financial Support

Pakistan is also seeking $4 billion rollover of Chinese loans that are maturing in next few months, including $2 billion in late March, sources said.

In addition, the main thrust will be augmenting size of currency swap facility from $4.5 billion to $10 billion. The net additional financial support that the government could request is roughly $5.5 billion, sources added.

The Currency Swap Agreement is a Chinese trade finance facility that Pakistan has been using since 2011 to repay foreign debt and keep its gross foreign currency reserves at comfortable levels instead for trade related purposes.

The benefit of this arrangement is that the additional Chinese loan will not reflect on the book of the federal government and will not be treated as part of Pakistan’s external public debt.

To a question, State Bank of Pakistan (SBP) Governor Dr Reza Baqir on Thursday said that the $4.5 billion financing under the Chinese foreign currency swap agreement was the liability of the SBP.

To another question about increasing the size during the PM’s visit, the SBP governor maintained that only the premier’s spokesman could reply in this regard.

In the last fiscal year, China had increased the overall limit from $3 billion facility to $4.5 billion for a period of three more years against the rupee with the maturity buckets of three months to one year.

Pakistan had paid Rs26.1 billion interest on the outstanding balance at agreed rates.


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